Core Systems Replacement: The Clock is Ticking

The clock on your core legacy systems is ticking. No, it's not going to explode when the clock reaches zero, but you can't place a value on the hundreds of lost opportunities that come with having a system that is not flexible enough to meet the demands of today's business environment and the customers you need.

In looking at what insurance technology leaders are focusing on for 2013, Frank Petersmark, CIO advocate for X by 2, explains most carriers remain focused on the core.

“There are sexy things like mobility and telematics—which are very important—but my strong vibe is core system transformation is still No. 1 for CIOs,” he says.

Insurers are looking at all areas of the core, from policy administration to claims to billing, according to Petersmark. The good news for carriers is there are better choices in the marketplace than ever before and the benefits that come from the implementation of new systems will be seen quickly.

“It's hard to do the other stuff—advanced analytics, predictive modeling, data, end-to-end portals, mobility—if the back end is still a mess,” says Petersmark. “Carriers are pushing hard for [core systems] and in 2013 that will be No. 1. It will get the bulk of investment, at least for another year.”

And what about the so-called “cool” technology? The lucky carriers, those that have already tackled their legacy issues have an opportunity to gain considerable advantage over their competition.

Petersmark believes about one-third of U.S. carriers have addressed their core system needs and those carriers will push hard in the advanced analytics, information modeling, and predictive modeling space.

“That's the next holy grail for IT shops,” he says. “There is so much untapped insight for carriers in the information they hold. They are going to be pushing hard on information.”

IT leaders also will be looking closely at the IT talent in the market that can address those information needs, according to Petersmark.

“I see a bit of a trend with the whole outsourcing area coming back the other way and the IT shops doing more insourcing,” he says. “They realize that for the work that is most important to the business and customers, they need more talent inside their shops. [Insurers] tried to farm it out, but frankly most of it hasn't worked. They don't want high-paid consultants ad infinitum. They need to find their own talent.”

Petersmark believes the mood among insurance CIOs that he has spoken with in recent months is brightening.

“They've turned the corner from cleaning up messes,” he says. “They are looking at what's next for the business. For p&c carriers, if the market is hardening a wee bit—and it seems to be—there are going to be business opportunities and they want their companies to be in good position to take advantage of it.”

The hard market could mean more money for IT shops, particularly for those carriers whose IT budget is determined by a percentage of gross written premium.

“If the market hardens, the carriers make a little more profit, revenues are better, and underwriting results, hopefully, are better,” he says. “A hard market is a good thing because the carrier will have more money. IT spending floats up with [more revenue].”

Petersmark believes there is a shift in thinking going on within the halls of insurance carriers from trying to manage expenses to a point where IT can deliver the tools to move the business forward.

“The good news is for most CIOs they no longer have to justify their core spend,” he says. “Most have that under control now and are looking to do something more. Those that didn't get it under control probably aren't CIOs anymore.”

As IT prepares for 2013, Petersmark maintains CIOs have to make the IT function as transparent as possible because some business people still struggle to understand what's going on behind the curtain.

Petersmark believes there are three components of IT spending: infrastructure and maintaining systems; required upgrades to software; and new technology.

For new projects, Petersmark feels it is fundamental to collaborate with business peers.

“If the project is automated underwriting, you get with the vice president of underwriting to go in on this as a united front,” he says. “That way you can break things out so you don't go to the table and ask for money without detailing what is needed. If you can trend the costs over the last few years and keep expenses at a steady level within that budget number, you can make money for IT to push out infrastructure costs and roll in more development costs.”